The CBO is not known for overestimating costs.  Quite the contrary.  So why aren’t the rest of us screaming? Where is the outrage?  Why aren’t these two Wards of the State part of Congress’s financial-reform plans with their highly symbolic  July 4 target for legislative passage?  How can we take any “financial reform” seriously that doesn’t even address these twin budget busters?  (See centermovement.org’s  “Financial Reform’: Partisan Politics and Lobbyist Study Buddies” for more discussion of this last question.)

People still rage about all those Big Banks on Wall Street getting TARP bailout funds. More than $700 billion approved for the fat cats who created the crisis?  How untoward!  Guess what.  They were loans, not gifts; nowhere near $700 billion went to Big Banks; and they’re paying back the funds they did get. Goldman Sachs even paid early, with interest of over 22%.  In addition to principal repayments, our federal government has earned  $23 billion in accumulated interest and dividends, and in May it sold for $6.18 billion the 1.5 billion shares of Citigroup stock it had acquired as part of its stimulus package.  The Treasury now estimates total TARP costs of $105 billion.  Most of that is because small banks on Main Street are still struggling and behind in their payments.  If TARP prevented recession from deepening into depression, the benefits of the bailout will have vastly exceeded its costs.

And yet, with people still angry at Big Banks, politicians win points for hating them as well.  President Obama reiterates how appalling but necessary it was to use taxpayer funds to bail out the very entities that allegedly caused the recession when a more ethical cause of action would have been to punish them.  It’s good politics to punish Wall Street now by legislating away their power to make billions with derivatives.  It may be good economics as well, but it’s also two-faced.  Fannie and Freddie should  be reined in as well.

Fannie and Freddie have also messed up, and taxpayers  are paying the price.  The twins are in big trouble because of all the sickly mortgages they acquired, packaged as securities, and guaranteed. In other words, they also created derivatives.  But their derivatives were safe – for the investors — not because of better intrinsic value but because the federal government backed the packages, basically insuring both interest payments and principal payback to those who purchased them.  Who bore the risk?  We taxpayers.  And we’re still bearing it, with the stakes growing ever higher.  Our government has been responding to Fannie’s and Freddie’s mistakes by giving them more money to continue on this costly course of action, while trying to take away or limit derivative creation by  private banks.

Acquiring forfeitures as part of their guarantee programs, Fannie and Freddie have become two of the nation’s largest landlords – or perhaps it’s more accurate to say that we the people have gone big time into residential real estate, because our Government now owns 79.9% of Fannie’s and Freddie’s  stock. The dividend on preferred shares is 10%.  Our loans to Goldman Sachs were a much better deal.

Meantime, Fannie’s and Freddie’s expenses mount.  Each house sale costs them an average of $10,000 and garners less than 60 percent of the money the borrower never repaid. Fannie and Freddie spent more than $1 billion on maintenance of their housing inventory in 2009.  Their lawn-mowing bill alone is $10 million a month.   People, behold our tax dollars at work.

Fortunately, the CBO is getting more honest, including Fannie and Freddie financial data in federal government budgets rather than continuing to segregate them as “off budget” items.   This decision took guts.  It was surely unpopular with most politicians.  We’re already voting against incumbents because of accelerating debt and deficits, and now the figures look even worse.

Unfortunately, the CBO record in analyzing other program costs indicates it is likely to have grossly underestimated Fannie’s and Freddie’s future losses.  (Oddly enough, our Government has actually been overestimating the cost of TARP.  As recently as last August, our President said we’d lose roughly $341 billion.)  Why are we getting set to legislate discipline of Moody’s and Standard & Poor’s for giving triple-A ratings to junk-mortgage packages without taking the CBO to task for all its endorsements of federal programs that go on to lose billions?  Why aren’t we reining in Freddie and Fannie?

Once again, it pays to see to whom Fannie and Freddie are giving campaign contributions.    Over the decade ending in our last election cycle, the twins contributed almost $200 million in lobbying and campaign contributions.  Who were the top two recipients from 1989 to 2008?  Number One is Senator Christopher Dodd, who served as general chairman of the Democratic National Committee  from 1995 to 1997 and now serves as Chairman of the Senate Banking Committee.   Number Two is President Barack Obama, who wasn’t even on the political radar scene for most of the period covered.  Senator and Republican Candidate for President John McCain, was only Number Sixty-Three, but his campaign manager, Rick Davis, was once a lobbyist for Fannie and Freddie, so dollars may underestimate influence in this case.

It’s ironic at best that July 4, the holiday we celebrate for our Declaration of Independence in 1776, may also be remembered for financial-reform legislation that implicitly declares  it’s okay to do nothing to eliminate the shackles imposed by Fannie and Freddie.  Absent action, these dependents of our state  will simply continue to contribute to burgeoning deficits and debts and to create dangerous derivatives.  Our Founding Fathers were courageous. Our people rebelled against taxation without representation. Where is our courage today?   Where’s our rebellion? Fannie and Freddie are being well represented by the politicians to whom they’ve contributed, while taxpayers are picking up the tab.  For most of us,  isn’t this also taxation without representation?

Obama says that his “Responsibility Fee” is designed in part to help the Treasury recoup its losses on its “Troubled Asset Relieve Program” (TARP), the dramatic effort started by Bush 43 and continued by Obama to unfreeze credit during our recession. The program began with loans, not gifts, to the recipients of its largess. And only Citigroup among the targeted banks has not paid the government/taxpayers back: the rest have done so with interest.  TARP is under water because the returned money went back out again – mostly to the automobile industry.  Obama is exempting GM, Chrysler and GMAC from his new fee.

Even worse, our President is exempting Fannie Mae and Freddie Mac from the fee and raising the $400 billion cap on losses they can incur for us taxpayer owners. Obama says Wall Street created the recession.  Most certainly, they contributed.  But so did our government policies of encouraging people of modest means to buy homes with relatively large mortgages.  This particular risk, we continue to embrace: raising the cap on losses invites more losses. [See “Rolling the Dice” in CenterMovement.org's archives for more on this topic.]

It’s so easy, and so satisfying, to be angry at all those big-brained bankers and their big banks and bonuses on Wall Street.  After all, they sold derivatives so opaque that even the regulators didn’t understand how risky they were, and when the derivatives went south, the bankers got bailouts and the buyers got bankrupcy.  Now, with unemployment still double-digits in the United States, Wall Street profits are back, big time, and bank bonuses have recovered, even bigger time.  What’s not to hate?

Do we hate the banks for being so rich?  How, then, do we feel about the Federal Reserve, which raked in $42 billion in profits last year? No individual bank on Wall Street is likely to match this performance.

Do we hate the bankers for being so rich?  How, then, do we feel about billionaire athlete/advertising icon Tiger Woods, entertainment mogul Oprah Winfrey with annual earnings in excess of $250 million, and singers Beyonce with $80 million and Jay-Z with $82 million, both in just a year’s time?  The $145 billion bank bonuses, spread as they are over many employees, are beginning to look less extreme – even before considering that celebrities also have the “nonpecuniary” returns of good looks and fame as well as fortune.

Clearly, Americans love some of the rich.  Do we hate others based on assumptions that their fortunes have been made, and secured, through dishonesty and economic and political corruption?  In other words, do we hate, and are we justified in hating, Wall Street bankers for taking taxpayer money, and getting ungodly bonuses with it for poor performance, even as the CEO of Goldman Sachs talks about doing “God’s work”?

The rage some of us feel about the new round of bonuses requires over-riding facts and running with emotion.  Performance last year, as measured by profits, was spectacular. And, yes, the banks got government money, but as loans  — to repeat — that all but one “responsibility”-targeted bank paid back with interest.  By some accounts, TARP prevented a recession from becoming a depression; in these scenarios, the short-term loans really benefited the country.  Facts may also serve to dampen rage in earlier instances, if we give them a chance. Or maybe they’ll fuel the fires – but let’s gather and examine them rather than leaping to condemnation without them.

Do bank and banker earnings take anything away from the rest of us?  Only our relative status. Profits help those of us who are stockholders. Only if profits are the result of higher (uncompetitive) fees and we’re bank customers and borrowers do they come at our expense. Bonuses hurt those of us who are bank shareholders only if they reduce dividends, net profits, and the value of our stocks, and there’s a special corporate venue to register our complaints. We can also vote with our feet by selling our stocks. The rest of us gain from bank and banker success — through the lavish amounts of tax revenue the banks and bankers provide the country, state, and city they call “home”.  Governments at each of these levels provide services that benefit the rest of us – or at least lower our taxes or their debts and deficits.  On the margin, the earned income of Wall Street’s top management is taxed at rates of 35% by the United States, 6.85% by New York State, and 3.648% by New York City. All of the bonuses are taxed, in sum, at 45.498%.   At their income levels, all of the bankers are pushed into Alternative Minimum Taxes (AMT), so the state’s and city’s revenue gains don’t come at the expense of national budgets: taxes deducted on Form 1040 are added back on AMT’s Form 6251.

Wall Street bonuses are likely to total some $145 billion for 2009.  That payout generates $65.9721 billion in revenue (some of which may deferred, depending upon how the tax codes treat payment in stock that cannot be sold for five years).  Of this impressive total, the US takes $50.75 billion, NY takes $9.9325 billion, and NYC takes $5.2896 billion.  Taxes on these bank bonuses comprise almost 20% of the $27 billion the city typically raises in taxes revenues for its $50 billion annual budget. All this, before considering the additional taxes on Wall Street profits. Bonuses may actually increase profits on net because of the incentives they provide employees to work harder and better.

President Obama’s Senior Advisor David Axelrod observed last fall that the American people have a “limited tolerance” for Wall Street bonuses.  Bonuses, however, are more closely related to performance than guaranteed salaries would be.  It’s hard, some times, to stomach learning that an already rich man got a bonus when his company suffered major losses.  But we have to look at this the way we’re supposed to look at the value of the whole Stimulus Package (of which TARP is just one piece). We have to ask what would have happened otherwise. For the Stimulus Package, the question is how many jobs Obama “saved” with taxpayer billions — how much “worse” unemployment would be without them. For the bankers, it’s how much “worse” the losses would have been without these clever banking executives and their incentive pay.

Allegedly, Obama’s “responsibility fee”, which is a tax on liabilities that aren’t insured by government, is proposed to discourage “too much” risk-taking.  Our government certainly needs an anodyne to all the unintended consequences of setting a national standard of “too big to fail”: who wouldn’t want to get too big, too fast, when such a standard basically socializes risk while keeping rewards private?

But it’s hard not to question the political motives of this fiscal policy when risk continues to be subsidized elsewhere.  Even within the banking sector, a better program would address size directly.  One alternative would be to tax asset or revenue bases and put the proceeds in the corporate equivalent of a “flexible savings account”, available for use only in the event of another bailout.  Rules and their enforcement, however, would both have to be in place to prevent our political leaders from raiding the cookie jar and drawing down this fund for other purposes.

Obama announced his plan to tax big banks right after bonus announcements had started getting big public play and right before he traveled to Massachusetts to help Martha Coakley campaign to be the 60^th Senator the Democrats needed to advance their healthcare reform agenda. Would that our President had addressed risk management issues for the entire economy rather than focusing on a sector so easy to hate.  Astute campaigner as he is, however, in Massachusetts Obama talked more about the crowd-pleasing taxes on big banks and bankers than he did about the increasingly unpopular House and Senate healthcare reform bills, even though it’s to get a government healthcare program quickly advanced that Massachusetts was holding a special election.

The Democrats lost that election, and Washington appears to be diverting attention from its implications for healthcare reform and next fall’s general elections by speechifying about even more taxes and regulations for evil and rapacious Wall Street. The “Fiscal Crisis Responsibility Fee” program is only part of a plan to punish banks and sound “populist” for Main Street. This plan is not without its perils.

James Thurber once counseled, “Let us not look back in anger or forward in fear, but around in awareness.”  Taxes and regulations based on the short-term political gains from pandering to the envious and resentful are unlikely to be strong fiscal and regulatory policy in the long run. Our problems are profound, and we should face them fearlessly and honestly. Now.